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Do You Really Want To Stay in Your House Forever?

Spider wrapping a grasshopper in its web

Reverse mortgages are sticky things. They can trap you in a house you no longer want or are unable to live in.
Photo source: Today I Found Out

Forever is a long, long time.

One of the “advantages” of a reverse mortgage is that you can stay in your house. I’ve even heard people claim that they want to stay in their house forever. Well, at least until they die. But is that a realistic ambition? And even so, will your spouse want to stay in the house after you have gone on?

These are serious questions, and they deserve serious thought.

When my mom died, Dad wanted out of the house as fast as humanly possible. There were too many memories everywhere he looked. And yes, they reminded him of the good times he and Mom had together. But they also reminded him with aching finality that she was gone.

He decided to sell the house and move out the the farm that has been in our family for more than 100 years. This move fulfilled one of his long-term goals.

Continue reading →

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Reverse Mortgage Versus Owner Financing Your House

A house and a pile of money.

Both a reverse mortgage and owner financing the sale of your house can produce an income stream over time. Both have advantages and disadvantages.

Deciding to sell your home is never easy. Reverse mortgages can be very alluring. Refinancing your house with a reverse mortgage may be the right decision for you, but it may not.

Selling your home and refinancing with a reverse mortgage both have one serious drawback: with either option, you limit your options should your situation change sometime in the future. With a reverse mortgage, you may not be able to sell your home later if you need to. If you sell it now, you won’t have it to sell later. The only choice you have that doesn’t constrain you in the future is to do nothing.

The numbers shown in here derive from the scenario presented in a previous post. They assume your house has an appraised value of $200,000 and you own it free-and-clear.

I hope the following comparison table makes it easier to choose.

Reverse Mortgage Owner Financed Sale Traditional Sale Do Nothing
Can I continue to live in the house? Yes. In fact, it’s a requirement. No No Yes
Can my children continue to live in the house to take care of me or my spouse? As long as one of the mortgagors lives full-time in the house No No Yes
Can I down-size to reduce living expenses? No Yes Yes Yes
Do I have to have a high equity in the house? Yes No, but the more equity you have, the more income you can produce No No
Can I sell the house later if my needs change? Yes, but it becomes more difficult the longer you hold the reverse mortgage. No No Yes
Is there an age requirement? The youngest applicant must be 62 or older. No No No
Is there an income requirement? Yes No No No
Will it produce a secure monthly income? So long as all other conditions of the mortgage are met Yes, assuming you’ve done due diligence on the buyer One-time payment No
How much would I make over 15 years? $117,360 $330,778 at 6% APR. If you need cash up front, it reduces the amount of interest you could earn. $200,000 as a one-time payment Nothing
What would that be in monthly payments? $652 $1,687 for 15 years $0 $0
Can I leave money to my heirs after the Medicaid spend-down? No If all the paperwork is written correctly Possibly, depending on how you manage your money
Which option is best for my family and me?
Please contact me or one of my partners if you’d like more information on reverse mortgages or the alternatives. Our number is 512-807-8777.
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An Alternative to Reverse Mortgages

A house and a pile of money.

If you need to downsize or raise money for a assisted living, selling your home to an investor like us may be your best bet for generating an income stream to meet your ongoing needs.

Okay. You knew it was coming. Here’s what we at Hermit Haus Redevelopment can do to help you if a reverse mortgage doesn’t meet your needs for any reason. You can sell us your house to generate a monthly income for a specified time (up to 3o years). In many cases, this contract may not interfere with Medicare benefits and can be inheritable, protecting your legacy. The big difference between this approach and a reverse mortgage is that you are selling your house.

  • If you need to stay in your house, a reverse mortgage may still be your best option.
    Being able to stay in your house is both the strongest point in favor of reverse mortgages and the reason reverse mortgages usually don’t make financial sense.

Now you may say this alternative sounds like owner financing the sale of your house. There’s a good reason for this feeling. It is owner financing the sale of your house, but don’t let that put you off. Owner financing has a bad reputation for two reasons:

  • Owners historically have not performed enough due diligence on their buyers.
  • Buyers who seek owner financing typically have credit problems.
Woman Thinking

Choices abound. It’s hard to predict the future. Will you want to or be healthy enough to stay in your current home the rest of your life. Reverse mortgages require you to do so, but selling your home now requires an immediate move. Only you can know which is the best decision for your situation.

These two conditions are additive. If you have both conditions in the same sale, you are almost guaranteed to have problems. The combination occasionally results in a non-performing mortgage, and the previous homeowner must take the uncomfortable step of foreclosing and taking back a property they thought was already sold.

Even though owner-financing problems are not nearly as common as most people believe, they do happen. When they do, the former owners are usually unprepared to deal with them, which is exactly why I recommend that most people not owner-finance their homes to just anyone.

But owner-financing your home to an investor like Hermit Haus, the situation is completely different.

  • Our motivations for seeking owner financing are not related to a history of poor credit performance.
    Rather we intend to make this a profitable transaction for all and need owner-financing to make it happen. Banking regulations limit the number of FHA-type mortgages an investor can have, and non-FHA mortgage can be very expensive to originate and hold. Plus they’re usually for much shorter time—often as little as one year, and paying 2-4% origination costs every year means the bank makes more money than the investor.
  • We have the resources to keep making payments, even if the house goes vacant for a while.
    And we have the resources to maintain the house. If you owner-finance to anyone, make sure they have a contingency fund set aside for ongoing maintenance.
  • A third-party servicing company services the note.
    If any problems ever arise, the servicing company will deal with them, not you, and we pay the servicing fees on top of the mortgage payments.You never have to worry about collecting late payments or even [shudder] foreclosing.

So, if you sell your home to an investor like us, you are turning your home into an asset that will generate income instead of a debt that grows with every dime you receive from the reverse mortgage company…that is, if you perform your due diligence on the investor. Next time, I’ll compare the two strategies to show which one make you more money.

Want to Learn More?

If you have questions, call us at 512-977-8077 and one of us will help you out.

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Reverse Mortgages: Security and Legacy

Coins stacked in growing piles.

The ads on television would have you believe a reverse mortgage will have you set for life. All you need to do is borrow against the equity in your house. But you may find that you end up with nickels, not dollars.

This is my last post specifically about reverse mortgages—at least, for a little while. We’ve already talked about some of the cloudier aspects of reverse mortgages, including how the mortgage company can foreclose. Today, I’m going to talk about how much cash you can raise and what happens when you’re gone. The numbers I present are based on a real-world example.

  • You raise cash with a reverse mortgage, but not as much as you might think.
    The amount of money you can raise from a reverse mortgage is limited by the amount of equity in your house. Let’s say your house appraises $200,000, and you own if free-and-clear. The maximum many reverse mortgage will loan is 70% of your home’s appraised value less fees and closing costs.

    Most reverse mortgages now pay out the majority of their cash distributions over your remaining life, as predicted by actuarial tables. If you’re expected to live another 15 years, the mortgage company would probably pay you about $652 each month or a total of $117,360 over those 15 years. That might not help you very much.

    Most people only get 50% of the equity in their homes. If you have an existing mortgage, the reverse mortgage company would pay off that mortgage and reduce your payout accordingly. In this example, the most you could get from a reverse mortgage if you still owed $100,000 would be around $50,000 paid out over your remaining life expectancy.
Mom, Kids, House, clipart

Even though you’re old enough to qualify for a reverse mortgage, today’s reality is that you may still have people who will need shelter after you’re gone. Reverse mortgages don’t provide for them.

  • You are leaving your legacy to the bank.
    To qualify for a reverse mortgage, the youngest applicant (usually a married couple) must be at least 62 years old. So long as either applicant occupies the home full-time, the mortgage and the income stream from it remain in place. But as soon as the last applicant dies or can no longer live in the house, the mortgage terminates, and the survivors must either deed the house to the lender or pay off the mortgage at 95% of the value of the house.

    Notice that I said, “95% of the value of the house,” not what is owed on the mortgage.

    If your house has appreciated, your heirs could have to pay more to save the house than you actually owe on it. And they have a limited time to comply. And this is true regardless of when the last mortgagor dies. If you and your spouse were killed in a car wreck two months after initiating that $140,000 reverse mortgage, the mortgage company could be due as much as $190,000, depending on the specific terms of your reverse mortgage.

    This would not be that big a problem in most cases. We often buy houses from heirs that don’t want the trouble of liquidating their parents’ unwanted old house. But in today’s economy, more children (and even grandchildren) are living in the same houses as their parents and grandparents. That accident I spoke of could leave them homeless unless they are unable to pay off the reverse mortgage, usually over a shorter time than it takes to settle an estate.

My last word on reverse mortgages comes from one of my mentors. Phill Grove told me, “Normal mortgage companies want the interest and will work with people to ensure they continue to collect the interest. Reverse mortgage companies want the house and can be much harder to work with.”

If a reverse mortgage is right for you in your situation, there are a number of reputable companies offering them. But it’s never as easy as the advertising makes it seem. Please consider the motives of anyone (including me) who says a particular strategy is good or bad for you. Are they telling you everything you need to know?

Next time, I’ll talk about an alternative to reverse mortgages. You might be interested in this alternative if a reverse mortgage doesn’t meet your needs or if you don’t qualify.

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Foreclosure and Reverse Mortgages

House with "Foreclosed" stamped on it.

The irony of a reverse mortgage is that the bank can foreclose even though you are not required to make payments.

Last time, we were talking about some of the aspects of a reverse mortgage you don’t usually hear about. I’m continuing that discussion today with another thing you don’t usually hear about:

  • Foreclosing on a reverse mortgage may be easier than foreclosing on a standard mortgage.
    Remember that bit from the last post about “your home must meet maintenance and other conditions that vary by the mortgage and mortgage holder.” Failure to maintain your home to the mortgage company’s standards can result in foreclosure, regardless of why you can’t maintain the home. I know of one homeowner who was required to spend the entire proceeds of their reverse mortgage on home improvements. Then they couldn’t keep up with their HOA fees and taxes. The mortgage company was quick to step in and foreclose on the house, even though the taxing authority would not have taken the home of someone over 65.

    Also remember that the maintenance standards are defined by the mortgage company. That means the mortgage company is who decides whether or not the home is properly maintained.

    Then, there’s that thing about sufficient equity. Every year you live in the house, the amount you owe the mortgage company increases. This increase isn’t usually a problem in an appreciating market, but what happens during a downturn? When you don’t have sufficient equity, the mortgage company may be able to take the house to protect its assets. Now I’ve been told this is only a problem on older reverse mortgages—that the current crop is much better and more protective of your interests. We’ll see.
    And finally, at least one of the parties to the reverse mortgage is required to live in the house. That means if one partner dies and the other needs to go into assisted living for more than a designated time (usually six months), the mortgage company has the right to foreclose on the home. So you can’t rely on the income from the reverse mortgage to help cover the costs of assisted living.

But what about all that stuff about reverse mortgages being government-backed? Doesn’t the government protect you from foreclosure?

The short answer is, “Not really.” Most of the guarantees built into the reverse mortgage program actually protect the lender, not the borrower. The strongest protection you have is that you must be able to financially qualify for the reverse mortgage.

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